How to Build a Solid Retirement

Take the bull by the horns and start planning for retirement now. Whether you're in your 20s or 50s, make $45,000 or $145,000 per year, have started saving or haven't, now's the time to make sure you're on the right path. Saving for retirement isn't easy. It takes hard work, dedication and commitment to make sure that your golden years will be has happy as your working years. Start by setting goals, reviewing your budget and speaking with a financial planner. The little steps now will go a long way toward allowing you to have the retirement of your dreams.

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Set Five-Year Financial Goals

Preparing a retirement savings plan can be an overwhelming task. If you've determined that you need to have over $1,000,000 saved in order to retire comfortably, it's easy to think that it's simply too hard to save that kind of money. But how much is actually needed is less important that putting the plan together. While experts sometimes disagree about how much is needed for retirement, it can be safely assumed that most people will need at least 80% of their pre-retirement income.

Breaking down your retirement and financial planning into manageable 5-year increments will allow you to check off goals as they're reached. For example, a young person just out of college with student loans to pay off should set up a 5-year plan that includes having the loan either paid down significantly or paid off in full in 5 years. Given the expensive proposition of a college education these days, the amount of student loan debt can increase rapidly. And even though student loans are usually low-interest loans that can be paid off over a number of years, getting them paid off as quickly as possible should always be on any five-year financial plan.

If you're 35 and saving for both a child's college education and retirement, see which investments will get you closer to those goals by the time you're 40. Between 35 and 55 is really the sweet spot of retirement planning. Most people are entering their high-earning years. And while expenses at 35 can be much higher than they are at 55 – children, car payments, mortgage payments, etc. – it's important to at least contribute to an employer-sponsored retirement account or IRA.

Perform an Annual Budget Review

Prices and needs change over time. For example, if you have a cell phone, do you need the landline? Is there a way to lower car insurance costs without sacrificing protection? Is there a way to cut costs on energy by turning off lights, using a timer to set the heat and air conditioning, or cutting back on drinks and restaurants?

Most of us spend money every day without even thinking about. By taking a good, hard look at credit card and bank statements, it's usually easy to come up with a few things that can be consolidated or cut completely. Over the past few decades we've become a nation of big spenders. While this has been good in some ways for growth, as we get older, we really do need to find ways to cut back and save more.

Enlist the Help of a Financial Planner

This may be the single most important part of building a solid retirement. A financial planner will help put together a realistic plan in order to meet both 5-year and long-term financial goals. He or she will also be able to prepare projections of account values based on what's already in the accounts, the amount that's being saved, and the annual compounded earnings. These projections are going to be a big part of figuring out whether or not you're on the right track. A financial planner can also show you ways to save money on taxes.

The Importance of Asset Allocation and Diversification

Asset allocation refers to the types of assets held in a portfolio. Common assets classes include stocks, bonds, commodities, CDs, and real estate. Diversification refers to the different investments within each asset class. For example, within the asset class "stocks" a diversified portfolio will hold mutual funds or 8 to 12 individual stocks from different market sectors. Market sectors of the S&P 500 are basic materials, conglomerates, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities. Each of these is further broken down into smaller market segments.

Asset allocation changes with age. Younger investors should always keep more of their assets in stocks than in bonds. For older investors, the reverse is true. However, diversification should not change with age. Even if an elderly investor has all of his or her money in bonds and cash, they should be diversified among US Treasuries, corporate bonds of different grades, municipal bonds (that are often tax-free), and CDs of different time lengths.

Separate Good Debt from Bad Debt

Most financial planners tell their clients to separate good debt from bad debt. Good debt is a mortgage. It's money that goes toward providing a solid and safe foundation for your family while increasing in value over time. However, the amount of your mortgage should not leave you "house poor." You still need to be able to pay all of the monthly expenses along with being able to save for a child's college education and your own retirement.

Bad debt is a credit card balance. It should go without saying that credit card debt should be avoided at all costs. Credit card debt eats away at savings faster than any other kind of debt. If you do have credit card debt, consider getting a part-time job or finding another means of income to eliminate it. It's critical to head into retirement without significant debt. If need be, it's better to work for another year or two to start retirement debt-free than having high-interest eat into your nestegg.

Plan for Major Financial Events

It's hard to foresee and plan for major financial events in our lives when we're young. Saving for a child's college education or a new home before we're even married is difficult. But preparing for events such as marriage, divorce, disability, and job loss will help to soften the financial blow of those events. Further, establishing a separate savings account for major events will allow most people to get through a difficult financial situation without having to tap into retirement savings early.

Staying Healthy

With healthcare costs on the rise, accounting for a large proportion of a retiree's cost of living, keeping yourself fit and healthy goes a long way towards securing a comfortable retirement. Not only will you enjoy life more and live longer, you will have more money available for discretionary spending. For example, cigarette smoking is expensive not just because of the cost of the cigarettes. Smokers pay more for health care, health insurance, life insurance, and car insurance.

Working out on a regular basis and watching what you eat is the surest way to reduce your healthcare costs, and it most cases all it takes is some dedication and willpower. Make sure you get annual checkups to monitor key vitals like blood pressure, blood sugar, and cholesterol levels and screen for early signs of cancer. Many cancers can be treated easily with early enough detection, saving thousands of dollars in healthcare costs. In contrast, late-stage treatments are not only more life-threatening but much costlier.

The Importance of Insurance

Insurance exists for one reason: to protect your income and your assets. With all the hard work you've put into planning and implementing your retirement, you don't want to be derailed by an odd turn of events. Make sure you are protected against the most common types of misfortunes: fire, flood, earthquake, hail, car accidents, theft, and disability. You should have insurance for all the above with reasonable deductibles and coverage limits.

While we've covered the basics of retirement planning here, there is much more to securing a great retirement. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.

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